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FSA clamps down on with-profits new business

Insurers will be forced to demonstrate that writing new with-profits business will not adversely effect policyholders’ interests under proposals outlined by the FSA today.

The regulator plans to clamp down on providers writing “loss-leading” new with-profits business amid concerns a “substantial minority” of firms are failing to secure sufficient capital to cover the costs of acquiring it.

The FSA says the current rule on new business, Cobs 20.2.28R, may not prevent the erosion of value of a with-profits fund as a result of companies making price promises they could struggle to keep.

The regulator says that, as a result, policyholders could suffer “material detriment”.

It says: “A substantial minority of firms have been writing new business into their with-profits funds that is loss leading in itself – that is it is priced in such a way as to make it attractive to advisers and/or customers but it will never break even – or not enough of it is being sold to cover the cost of acquiring it.

“In both cases the consequence is that the new business being written erodes the value of the with-profits fund. This, in turn, means that over time there is less money available to distribute to with-profits policyholders.

“We believe that, given these findings, the rule as it is currently framed does not necessarily achieve the intention of preventing erosion of the value of the with-profits fund.

“In other words, it gives scope for minor or ‘immaterial’ detriment. Our concern is that over time even minor detriment, when aggregated, has the capability to become material detriment.”

The wide-ranging paper also proposes removing the ability of firms to apply market value reductions on the grounds of surrender volumes only, so an MVR may only be applied where the face value of the policy is higher than the value of the underlying assets.

The consultation, titled ‘Protecting with-profits policyholders’, follows a commitment from FSA chief executive Hector Sants to the Treasury Committee in 2008 to review the way in which firms have implemented the rules in Cobs 20. This in turn triggered the With-Profits Regime Review, which has informed the consultation.


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There are 15 comments at the moment, we would love to hear your opinion too.

  1. Wouldnt it just be better if they went and sorted the few firms they have issues with?

    It would be cheaper just to sort them.

  2. I`ve just come up with a tag line for the FSA that applies to everything they suggest regarding new rules. “Horse has bolted regulation a speciality”

  3. With Profits funds should only be allowed to be sold to cutomers by “mutual” organisations. If there is apportionment of profits between policyholders and shareholders there can be only one outcome. Guess who wins? Yep, correct.

  4. Hands up anyone who thinks the FSA will actually understand “new business strain?”

    Thought not…

  5. A welcome move by our regulator to stop unsustainable business practices in offering long term loss leaders. It makes you wonder what they really think of stakeholder products although RU64 remains for the time being!

  6. For a considerable number of years with profits policies done the general public proud. My parents, who unfortunately are no longer with us, (gives an inidcation of their age when they took them out.) had several with profits policies which gave very good returns. The were among many thousands of people who ended up like them with good returns on their premiums. Subsequently things started to go wrong with endowments which set the rot in. I am not sure that the FSA dictating products is the way forward and if they do, will they take responsibility if things go wrong in the future. I doubt it, but again if they did, no doubt our fees would go up to pay compensation so they could end up being the same as other organisations which we have had to pay for.

  7. So, nobody in the Standard Life WP fund suffered any detriment when the regulator forced them to sell equities near the bottom of the market and to buy relatively expensive fixed interest. It ticked a theoretical ‘risk’ box in Canary Wharf but even at te time was regarded as rather silly. So as well as stable door, horse and bolted we should add glasshouses and stones. Anyway at least the new buisness customers over the last decade or more will be chuffed that the FSA have decided to take a peek at this now, what next? The South Sea Bubble, The Darien Scheme?

  8. Hear Hear to Anonymous’ comment on Standard Life and the regulator forcing equity sales by its with profits fund.
    This was particularly unjust to its with profits annuitants because there was no risk that they would cash in their policies and the liquidity protections in place for the annuitant’s fund were substantial.

  9. Yet again the FSA is trying to create a “risk free” society for us all in the name of consumer protection. Is this what we really want I wonder?

    The costs can only increase and the benefit seems very limited if any.

    Agree with Anonymous 24 Feb @12.48.

  10. I am astounded that the FSA has said they want the offenders to stop and that seems to be that. Are they not going to make them give redress and put the funds back in that have been watered down? I know that if we had sold these, we would have had to make up the shortfall. Again biased regulation! When we sold endowments in the past, the LAUTRO illustrations & ‘pinks’ all showed what a great deal they were. We didn’t know that they were robbing Peter to pay Paul and that thir figures didn’t stack up. The ‘pinks’ breakdown of guaranteed, reversionary & terminal bonuses all showed how brilliant these policies were and then the ‘fan’. The FSA seem to have allowed this to happen again and again don’t seem to be making the perpetrators pay back the investors. When will the Govt. take notice of this and bring the regulator to book?

  11. There is a vast difference between with-profits and stakeholder.

    With-profits when open and adding new business worked and still does with the companies which continued as they were, stakeholder failed.

    Which one does the FSA support?

  12. If I was cynical I would suggest that clients go to the Telegraph Skipton for advice. Skipton have experience of WP bonds as they sold them and now give advice to policyholders who hold them!

  13. The FSA have three new core principles: 1) address issues that we should have noticed years ago. 2) Focus on high profile situations rather than high value ones 3) Force companies to take actions that we will susequently take no responsibility for when they go wrong (Standard Life!). When will the Govt review the ridiculous and costly activities of this directionless quango?

  14. Anonymous | 24 Feb 2011 12:48 pm

    So, nobody in the Standard Life WP fund suffered any detriment when the regulator forced them to sell equities near the bottom of the market and to buy relatively expensive fixed interest.

    Now now the FSA has denied that Project Jasmine ever took place so we are not supposed to talk about it.

  15. Given that the ‘with profits’ issues hit the limelight a decade ago, why has it taken so long for the FSA to make these weak statements.

    If it had been remotely competent, the FSA would have made it illegal for life offices to write loss-making ‘with profits’ business ever since the Standard Life fiasco or the Equitable Life debacle.

    Of course, the truth is that the FSA, and numerous other quangos (OFT, the FSO) together with the financial press (stuffed full of people who know very little about financial services or the products they condemn) signed the death warrant for ‘with profits but allowed certain life offices to continue writing it.

    Yet despite all this, an IFA has to jump through hoops and leap over mountains to prove that any advice to transfer a client out of a ‘with profits’ product is a sensible course of action.

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